OREANDA-NEWS. November 22, 2012. Bonds issued by the AHML’s mortgage agents differ significantly from traditional securities. They are more complicated in terms of calculations and require certain assumptions to be made for this purpose. At the same time, they often offer interesting investment opportunities and comfortable investment periods at limited risk.

When estimating the rate of such bonds manually, an investor needs to sum up projected CPR and CDR for the relevant year. We have created a calculator that already contains this input.

The CPR and CDR data loaded into the calculator is automatically converted into daily values, and depreciation payments for an entire issue are calculated using the number of days expired after the most recent payment. After that, the ratio of the calculated payments to the original nominal value of the tranche (Class A1) is found and the result (column AA) is recorded as a rate of depreciation of the nominal value of the tranche (column J). All cash flows can be viewed in column M.

To simplify the calculation procedure, we suggest using an average depreciation rate determined on the basis of historical payment data on AHML 2011-2 A1, AHML 2011-1 A1, AHML 2010-1 01, AHML 2008-1 1A and AHML SMA 1A. It ranges from 5% through 10% (depending on the nominal value of the issue) of the nominal value per coupon payment for these issues. Values produced by the calculator only slightly deviate from the results of the more complex method. Thus, the difference between the duration outputs of the CPR+CDR and the averaged rate methods is as little as 0.1-0.2 years. This, however, is only true provided the economic environment is relatively stable and the mortgage pool is homogenous.